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At the July FOMC, the immediate feedback — informed by the reaction in yields — was that the Fed is behind the curve, costing the institution credibility.
Since then, we've seen a negative print on job creation in the payrolls report, and the most recent inflation reads — CPI and PPI — have come in-line.
The new feedback: Warsh was right to wait. As indicated by the recent price moves, the market is more comfortable. And, it isn't just because the macro is cleaner; the micro — corporate earnings — are doing their part too.
FactSet's most recent report shows the best profit margin readings since the data series started in 2009, the best earnings growth since coming out of the rolling recessions in 2021, and all eleven sectors reporting higher earnings today than on June 30, driven by upward EPS revisions and positive surprises.
That won't stop certain Fed hawks — like Hammack — from arguing "the time is perfect" to raise rates. I won't mince words: this is purely noise, and I don't think the motivation is pure. Given how often she's speaking and the intellectual rigidity on display, she reads like someone trying to make a name the way Bullard did in 2021–2022. Bullard ended up being right — but those conditions don't exist today. Even if Hammack is successful in getting the Fed to hike, it won’t be for the reasons she’s citing.
Today, the S&P 500 slid a drink across the bar to price levels above 7777 — the level where I believe the market is telling us the backdrop has materially improved across the board, or that uncertainty has come down. From here, I don't expect fiery moves higher. I expect the melt-up: a few points a day, no news, dips bought everywhere, stocks getting the benefit of the doubt.
So long as we don't get too frothy, this melt-up could make for a benign summer for investors — and a frustrating one for traders who rely on higher volatility.
As for the yield picture, which does remain uncomfortably elevated, my thesis is that this a return to normal — the real normal, not the post-GFC or post-COVID normal.
Long yields between 4-5%
Oil between $70-90/barrel
Companies engaging in balance sheet optimization (debt v bond issuance)
The backdrop is reminiscent to 2010-2015. The period is widely remembered as the era when the active-to-passive shift accelerated dramatically because generating alpha (outperforming the market) became incredibly difficult:
While the S&P 500 delivered a massive 80% total return (approximately 10% annualized) according to Google's Finance Data, the vast majority of active mutual fund and hedge fund managers underperformed cheap index funds.
The market today moves a lot faster than the market of that era. As such, even if we are entering a period where an active hand may not be best, it won’t last 5 years… unless, you have already decided passive is king.
As such, whether you are a trader or investor, stick to your discipline.
Now is not the time for nuance. Price is telling you the water is fine — better than fine. Uptrends are everywhere, even in the alt managers: OWL, BLK, and others. It's summer; jump in the water and enjoy it. Don't get in the way of success here. Less active hands is probably the better approach right now.
This is not investment advice. Positioning and price targets reflect the author's personal views and are subject to change without notice.